The consolidation of the global natural resources industry in response to the bursting of the the commodities bubble of the early years of the decade and the subsequent global recession means one of two things: more joint ventures such as the one between BHP Billiton and Rio Tinto in iron ore or more combinations within a limited group of companies who need global economies of scale.
The collapse of Chinalco’s proposed $19.5 billion investment in Rio earlier this month makes it a potential bidder for either Anglo American or Xstrata, who have embarked on a merger dance of their own. Anglo’s iron ore, platinum, coal and copper assets make it the better prize for Chinalco. Xstrata’s scrappy entrepreneurial management style would sit uncomfortably with the state-controlled giant, making the Swiss-based company a more natural partner for Brazil’s Vale. Chinalco would also be better placed to circumvent the labour and monopoly concerns the South African government has raised that any bidder for Anglo will have to deal with.
Chinalco, though, will have to come up with a deal that values Anglo at somewhere upwards of $45 billion. Anglo shareholders have already rejected Xstrata’s no premium bid, and a 30% premium is the benchmark for successful mining industry mergers. Anglo’s current market capitalisation is $35 billion. Nor would Chinalco be likely to be able to squeeze out the $700 million-1.5 billion of cost savings (taxed and capitalised worth $3 billion-6 billion) that Xstrata sees in Anglo that could justify a lower bid price.
Filed under Economy, Markets
Australia is walking a fine line over Chinese investment in its natural resources. It has approved Chinalco’s recent purchase of a minority stake in Anglo-Australian miner Rio Tinto, but said any further share purchases will require prior approval. Nor can Chinalco have a seat on Rio’s board, Wayne Swan, Australia’s Federal Treasurer, ruled on Sunday.
State-owned Chinalco, along with the U.S.’s Alcoa, has been buying what they say is a target 14.9% stake in Rio, the subject of a $164 billion takeover bid from BHP Billiton. The pair said in February that they had paid $14.1 billion for a 12% stake in Rio’s London-listed shares, or 9% of the total group. As a consumer of iron ore in particular, China doesn’t like the prospect of so much supply being concentrated by the merger of the world’s no 2 and no 3 products.
Approval of the share purchases to date was expected, despite some muttings that Australia was leaning towards backing off its open-to-foreign-investment stance. The Australian government does seems to have used the ruling to set a ceiling on what it it considers an acceptable level of Chinese investment, and that may mean Chinalco won’t end up with a large enough shareholding to have a material affect on the outcome of the Rio-BHP bid.
The other point in all this is that while China is still an important market for Australian natural resources, taking 20% of Australia’s output, Australia is getting relatively less important as a supplier as China’s needs continue to grow and China’s companies turn to mines in Africa and South America. Rio and BHP operate on those continents, too. The Australian government may be walking the wrong line.
Reports from Australia ahead of that country’s prime minister’s visit to Beijing that China wants to elbow its way into the takeover by BHP Billiton, the world’s largest mining company, of its rival Rio Tinto.
In February, it acquired a 9.3% stake in Rio for $14 billion through state-owned Chinalco. Wanting to secure raw materials for its steel industry, Chinese officials have been concerned that BHP’s $135 billion bid for Rio would lead to the merged group having too much power in negotiating prices. The price of iron ore has jumped fivefold since 2001, while coal prices are more than twice last year’s levels.
Baosteel has repeatedly been touted as a BHP bidder, but it would be a financial stretch even for China’s leading steelmaker. Just a 9% stake in BHP could cost upwards of $20 billion.
A consortium bid, if one is to materialize, seems more likely. And a consequential minority stake is more likely than an outright bid. Offshore investors must gain Australia’s Foreign Investment Review Board approval to buy more than 15% of a local company. Entities judged to be backed by Sovereign Wealth Funds cannot buy any shares without FIRB approval.
There are plenty of other deals for Prime Minister Kevin Rudd to talk about during his visit, too: Sinosteel Corp last month offered A$954 million for iron ore miner Midwest Corp, while China Metallurgical Corp has agreed to pay $300 million to buy a Cape Lambert Iron Ore Ltd project. Shougang, China’s fourth-largest steelmaker, already holds an 8.4% stake in Australasian Resources Ltd, which is developing an iron ore mine in Australia, all of which is making some Australians call for tighter regulation of foreign investment in the country’s natural resources.
State-owned China National Offshore Oil Co (CNOOC) ran into a wall of xenophobia that stopped dead its bid for the U.S. oil company Unocal in 2005. With the world even more sensitive to China’s global scavenge for natural resources, state-owned Aluminum Corporation of China (Chinalco) is seeking to preempt similar objections to its investment in Australia’s Rio Tinto.
Chinalco has taken a 9% stake in Rio in partnership with Alcoa of the U.S. Rio is trying to fend off the $140 billion takeover interest of fellow Australian miner BHP Billiton, prompting speculation that Chinalco might make a bid or be positioning itself to buy Rio’s aluminum assets, notably Alcan. A 15% stake would trigger a review under Australia’s inward foreign investment rules. BHP has to make a formal bid Wednesday or walk away for six months under takeover rules.
Though still shy of that, Chinalco has voluntarily submitted itself to an informal review. Australia Prime Minister Kevin Rudd and Foreign Minister Stephen Smith met Foreign Minister Yang Jiechi and Natural Resources Minister Martin Ferguson met Chinalco president Xiao Yaqing in Canberra this morning to discuss the investment.
Any deal that leaves a state-controlled foreign company controlling significant Australian natural resources would potentially put Australia in a delicate position with one of its leading trade partners. The government has been dancing around the question of whether either a bigger Chinalco stake or a full bid would fall foul of national-interest provisions of the foreign investment rules.
In 2001 John Howard’s government blocked Royal Dutch Shell’s planned $9.1 billion takeover of Woodside Petroleum, the Australian oil and gas group, on just such grounds.
Meanwhile, on a much smaller scale Sinosteel looks set to by Australia’s iron-ore miner Midwest Corporation for $1.1 billion, now Murchison Metals, the Australia-listed mining group backed by Mitsubishi of Japan has abandoned its bid. Sinosteel has made a highly conditional offer for Midwest but has yet to make a formal bid despite building a 20% stake.
One final thought: if Chinalco does end up buying Alcan off a merged BHP-Rio, that will likely trigger national-interest reviews from the Canadian and French governments. More delicate dancing to come.
Already nervous about the proposed $100 billion-plus merger between two natural resources giants, BHP Billiton and Rio Tinto, China, one of the world’s biggest consumers of the iron ore, aluminum and other minerals that BHP and Rio Tinto dig up, has jumped in with both feet.
Aluminum Corp. of China (Chinalco) and the U.S.’s Alcoa staged a joint dawn raid on Friday to grab 9% of Rio Tinto, paying $14 billion for the stake, a 21% premium on the closing price of Rio Tinto’s shares the previous evening. The purchase is one of the largest overseas investments by a Chinese company and comes just days before a Feb. 6 deadline for BHP to table a formal bid or walk away.
Question is, is this a defensive move in case a BHP bid for Rio Tinto goes ahead, a spoiler, or an offensive move in the event any bid lapses or fails or if Rio Tinto looks for a white knight. Short of a full takeover, Chinalco could simply be trying to put itself in a strong position to negotiate for Rio’s aluminum assets if BHP does buy Rio.
That, indeed, may be its endgame (and explain Alcoa’s presence). For now, though, Chinalco and Alcoa are keeping all options open.
Filed under Economy, Markets
“The report that Baosteel plans to buy Rio Tinto is untrue,” says Xu Lejiang, chairman of China’s biggest steel maker, quoted in the China Securities Journal. That is the same Xu who earlier was quoted in 21st Century Business Herald that a bid for the U.K.-based natural resources company was “quite likely”.
So take your pick. The motive for such a bid remains unchanged: Chinese steel makers are concerned by the potential pricing power over their raw materials that a potential Rio Tinto-BHP Billiton merger implies. At the same time Baosteel remains too small to mount such bid alone.
Xu’s first comment first sent Baosteel’s share price soaring before his retraction brought it back to earth. But as John Harding writing in the London Times notes, Xu is not behaving seriously. “The Baosteel chairman’s comments have served as a reminder of the potential power of corporate China, but, at the same time, they also undermine his credibility and that of his company.”
Harding’s main point is that the mishandling of a relatively simply matter of talking to the press doesn’t provide any confidence that the company is mature and sophisticated enough to manage an international conglomerate like Rio Tinto.
The notion of a Chinese consortium bid for Rio Tinto is back in play, with the 21st Century Business Herald, here via AP, quoting Baosteel’s chairman, Xu Lejiang, as saying there was a strong possibility of such a bid.
The case for the country’s steel makers owning a significant supplier of their raw material has been well rehearsed. The new element in the story is that financial backing for what would probably need to be a bid of at least $200 billion would be coordinated by the National Development and Reform Commission, China’s top economic planning agency, rather than China’s new sovereign investment fund which has repeatedly said it is not tying up with the steel makers to make such a bid.
Though Baosteel is China’ largest steel maker, its publicly traded arm has a market capitalization of $35 billion making it too small to launch a bid alone. If it has difficulties recruiting domestic partners, an alternative could be the giant Japanese steel maker Nippon Steel, with which it has a joint venture. Such a cross-border approach could mitigate international concerns about a purely Chinese bid, though it would complicate the deal and subsequent management of the new company should the bid — should it come — be successful.
The unsourced report in China Business, here via AFX, that China’s newly launched sovereign wealth fund, China Investment Co., and a number of steel firms, including China’s biggest, Shanghai-based Baosteel, will bid $200 billion for U.K.-based Rio Tinto hits two themes.
The first is China’s concern that a combination of two of the world’s largest natural resources companies (Australia’s BHP Billiton has a $142 billion offer out that Rio Tinto has rejected as too cheap) would put near monopolistic pricing power over raw materials — iron ore for steelmaking in this case — that China needs to grow its economy in the hands of a private non-Chinese entity.
China is the world’s largest iron ore importer. World ore prices have tripled since since 2002, largely on demand from China. Similar concerns over the pricing power of a combined BHP and Rio have been expressed by the Japanese and European steelmakers’ industry associations. Brazil’s Cia. Vale do Rio Doce would be the only other iron ore supplier of similar size.
The second theme highlighted by the report is that Beijing is ready to redeploy its foreign exchange reserves for strategic economic ends via its sovereign wealth fund. That will send xenophobic jitters through the west, though it is what sovereign wealth funds do.
As I noted earlier, a Chinese-backed bid for Rio Tinto isn’t out of the question. I still think a stand ’em up, knock ’em down takeover fight for control is unlikely. That would not be the way one would expect China Investment Co. would want to announce itself to the world, but it does have Blackstone at its side should it so choose to do. (Update: China Investment Co, has denied China Business’s report.)
BHP will likely raise its offer. Rio Tinto has yet to lay out its defense (that may come as soon as Monday), and there are plenty of private equity companies that might be interested in getting in on the action. Still all to play for and the stakes remain high.
Filed under Economy, Markets
So much attention is paid in the West to China’s pursuit of natural resources, and oil in particular, in Africa that it is often overlooked how China is not having things all its own way.
A reminder of that in this piece by Patrick Barta in the Asian edition of the Wall Street Journal, following on the news that China Development Bank had taken a small stake in the mining giant Rio Tinto ahead of the bid for it from BHP Billiton.
Whereas Western companies are losing clout in the oil industry, the opposite is true in mining. Barta points out that in iron ore, three companies — BHP, Rio and Brazil’s Companhia Vale do Rio Doce — control roughly 75% of international trade. Copper and coal are problem natural resources in this regard for China, too.
Chinese natural resources companies have been told by Beijing to buy abroad. So far their forays have been modest. Having been bloodied in other attempts at big international takeovers, a counterbid for Rio Tinto to BHP’s from a China-led or funded consortium isn’t likely, though not out of the question. The stakes are high.